North Korea: Recent Developments

The strategic calculus has not changed around North Korea, but some details have. Unlike the recent cruise missile strike in Syria, kinetic action against North Korea would have far reaching consequences for businesses and governments in the region. Kim Jong-un relies on bellicosity for domestic legitimacy and international attention. He would react to an attack on his country with violence directed primarily at South Korea, sparking an exchange with dire regional consequences. The risk of mass migration across borders and the attendant challenges of millions of North Koreans fleeing a war is something neither China, nor South Korea, wants.

It is wrong to assume that because the US took unilateral action against the Assad government, that it will do so against Kim Jong-un’s military apparatus. The US is not, yet, directly threatened by North Korean missiles, and stands to lose much in the way of resources and energy fighting a land-based Asia war. Allowing China to shore up the threat is preferable.

It is possible that the Trump administration, having learned cruise missiles control news cycles, will search for the threshold required to attack North Korea, but voices in the region will call for restraint. Nevertheless, Japan’s Prime Minister Shinzo Abe did not miss an opportunity to link action in Syria with North Korea last week, stating the North was prepared to fill warheads with sarin, the same chemical agent that provoked response in Syria.

Both the strike in Syria and posturing around Korea have alternately satisfied and frightened various corners of the foreign policy elite. Many will agree that a United States that is willing to provide global leadership, through the organizing principle of deterrence, is better than a rudderless international political system. Others will counter that this thinking leads to unnecessary and wasteful intervention. Limited kinetic action is not possible in North Korea, due to hardened and geographically disparate targets.

While regional governments ponder and plan to prevent these contingencies, business continues as usual. From last weekend’s Business Insider:

“Asia trades as if North Korea wasn’t a problem,” Federico Kaune, the head of emerging markets debt at UBS Asset Management, told Business Insider. “Quite frankly, I don’t think markets are pricing in fully — or not even to some extent — the North Korean risks.”

Geoffrey Wong, head of global emerging markets and Asia Pacific equities at UBS Asset Management, told Business Insider that the situation today is “very different” from the past, and that markets aren’t pricing in the current North Korean risk right now.

The global business community should begin understanding how to price in geopolitical shocks. Current pricing models do not fully account for these potentialities, only qualitative assessment of political realities will do. This analysis requires a mix of skills in an ever-broadening array of fields (intelligence, business risk, demographic analysis etc.) A kinetic conflict on the Korean peninsula would involve market disruptions across dozens of industries. Shipping lanes would clog, oil and gas infrastructure would reorient to a war footing and financial markets would swing wildly.

While the overall strategic calculus around the North Korea situation has not changed, the country did display new weaponry during last weekend’s parade, and a firm strategy from the Trump administration has yet to be delivered. Just because an event carries a low probability, does not mean it carries a low impact. In the case of North Korea, details matter.

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